The article as it appeared on DJX: U.S. Takes Aim at ‘Forced’ Insurance

By Alan Zibel and Leslie Scism

WASHINGTON–A U.S. housing regulator will bar mortgage companies from accepting lucrative payments to arrange a controversial form of homeowners’ insurance, according to government officials.

The Federal Housing Finance Agency is pushing ahead with a ban on fees for “force-placed” insurance policies–expensive coverage that is thrust upon borrowers whose regular homeowners’ policy has lapsed–despite industry objections that such a move encroaches on state regulators. New York and other states are cracking down on such policies.

Rather than set rules on what insurers can charge for such policies, which is generally the purview of states, the FHFA will prevent mortgage servicers that do business with Fannie Mae and Freddie Mac from accepting certain payments. Such a move essentially would bar the entire industry from the practice, since Fannie and Freddie back about two-thirds of U.S. home loans.

The FHFA is expected to ban two forms of compensation from insurers to banks that collect borrowers’ payments on home loans: sales commissions for placing coverage with particular insurers and reinsurance relationships in which the bank or mortgage servicer is paid for taking on a portion of the insurance risk.

The FHFA move comes on the heels of efforts by insurance regulators in New York, California and Florida to bring down the cost of force-placed insurance through measures such as rate reductions and bans on the fees paid by the insurers.

Critics say tight relationships between insurers and banks have inflated the cost of policies and prevented a competitive insurance market from developing, as banks reap a substantial profit from fees paid by insurers.

Insurers say the price of their policies reflects the risk they assume considering that they typically issue policies without inspecting properties, many of which are abandoned.

Regulators have become concerned about force-placed policies, which are put into effect to protect banks’ collateral in case of fire or other serious damage to the property. Consumer advocates and state officials say the force-placed policies cost far more than standard homeowners’ coverage. The use of such policies increased during the housing-market meltdown, when about 3% of mortgages were protected by the coverage, according to industry figures. Most polices are in place for under a year.

New York Department of Financial Services Superintendent Benjamin M. Lawsky has referred to a “kickback culture” in describing the relationships between insurers and banks. Earlier this year, Mr. Lawsky struck agreements with the force-placed insurers operating in New York to ban the commissions and other payments, among other measures.

Officials at Fannie Mae, concerned about the mounting cost of force-placed policies, developed a plan last year to limit the cost by creating an insurance consortium to increase competition and potentially cut costs by 30% to 40%. But the FHFA rejected that plan over concerns about Fannie Mae’s ability to implement such a complex change, the officials said.

The FHFA’s move will result in a “meaningful to modest” loss of revenue for mortgage servicers, said Tim Rood, a partner with Collingwood Group, a Washington-based mortgage-industry advisory firm.

The force-placed market is currently dominated by two companies, Assurant Inc. and QBE Insurance Group.

“We look forward to continuing to work with FHFA, [Fannie and Freddie] and lenders to provide coverage as needed and help move the industry forward,” an Assurant spokesman said. A QBE spokeswoman declined to comment.

Insurers say they make repeated efforts to warn borrowers they will be subject to force-placed coverage if they stop making payments on their standard coverage. Homeowners generally let their policies lapse for financial reasons.

Bob Davis, an executive vice president with the American Bankers Association, said the housing regulator took a balanced approach to the issue. “Both the insurance industry and the banking industry will find a way to adapt,” Mr. Davis said. “It’s something we can deal with.”

Consumer advocates said they are disappointed FHFA isn’t doing more to rein in the costs of coverage, such as backing the Fannie Mae insurance consortium. While New York, California and Florida are requiring rate reductions, other states are likely to be less aggressive, said Robert Hunter, director of insurance for the Consumer Federation of America and a former state and federal insurance official. “The states haven’t done it except very spottily,” Mr. Hunter said.

Write to Alan Zibel at alan.zibel@wsj.com and Leslie Scism at leslie.scism@wsj.com

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